Delta Company, a U.S. MNC, is contemplating making a foreign capital expenditure in South Africa. The initial cost of the project is ZAR13,400. The annual cash flows over the five-year economic life of the project in ZAR are estimated to be 4,180, 5,020, 6,010, 7,000, and 7,850. The parent firm's cost of capital in dollars is 9.5 percent. Long-run inflation is forecasted to be 3 percent per annum in the United States and 7 percent in South Africa. The current spot foreign exchange rate is ZAR per USD = 3.75. Required: Answer is not complete. Complete this question by entering your answers in the tabs below. Required A Required B Required C Required D Calculating the NPV in ZAR using the ZAR equivalent cost of capital according to the Fisher effect and then converting to USD at the current spot rate. Note: Do not round the intermediate calculations. Round the final answer to the nearest whole number. NPV in USD using fisher effect $ 563 < Required A Required B > a. Calculating the NPV in ZAR using the ZAR equivalent cost of capital according to the Fisher effect and then converting to USD at the current spot rate. b. Converting all cash flows from ZAR to USD at purchasing power parity forecasted exchange rates and then calculating the NPV at the dollar cost of capital. c. Are the two USD NPVs different or the same? d. What is the NPV in dollars if the actual pattern of ZAR per USD exchange rates is: S(0) = 3.75, S(1) = 5.7, S(2) = 6.2, S(3) = 6.5, S(4) = 6.9, and S(5) = 6.9?
Delta Company, a U.S. MNC, is contemplating making a foreign capital expenditure in South Africa. The initial cost of the project is ZAR13,400. The annual cash flows over the five-year economic life of the project in ZAR are estimated to be 4,180, 5,020, 6,010, 7,000, and 7,850. The parent firm's cost of capital in dollars is 9.5 percent. Long-run inflation is forecasted to be 3 percent per annum in the United States and 7 percent in South Africa. The current spot foreign exchange rate is ZAR per USD = 3.75. Required: Answer is not complete. Complete this question by entering your answers in the tabs below. Required A Required B Required C Required D Calculating the NPV in ZAR using the ZAR equivalent cost of capital according to the Fisher effect and then converting to USD at the current spot rate. Note: Do not round the intermediate calculations. Round the final answer to the nearest whole number. NPV in USD using fisher effect $ 563 < Required A Required B > a. Calculating the NPV in ZAR using the ZAR equivalent cost of capital according to the Fisher effect and then converting to USD at the current spot rate. b. Converting all cash flows from ZAR to USD at purchasing power parity forecasted exchange rates and then calculating the NPV at the dollar cost of capital. c. Are the two USD NPVs different or the same? d. What is the NPV in dollars if the actual pattern of ZAR per USD exchange rates is: S(0) = 3.75, S(1) = 5.7, S(2) = 6.2, S(3) = 6.5, S(4) = 6.9, and S(5) = 6.9?
Chapter14: Multinational Capital Budgeting
Section: Chapter Questions
Problem 29QA
Related questions
Question
Transcribed Image Text:Delta Company, a U.S. MNC, is contemplating making a foreign capital expenditure in South Africa. The initial cost of the project is
ZAR13,400. The annual cash flows over the five-year economic life of the project in ZAR are estimated to be 4,180, 5,020, 6,010, 7,000,
and 7,850. The parent firm's cost of capital in dollars is 9.5 percent. Long-run inflation is forecasted to be 3 percent per annum in the
United States and 7 percent in South Africa. The current spot foreign exchange rate is ZAR per USD = 3.75.
Required:
Answer is not complete.
Complete this question by entering your answers in the tabs below.
Required A Required B
Required C Required D
Calculating the NPV in ZAR using the ZAR equivalent cost of capital according to the Fisher effect and then converting to USD
at the current spot rate.
Note: Do not round the intermediate calculations. Round the final answer to the nearest whole number.
NPV in USD using fisher effect
$
563
< Required A
Required B >
a. Calculating the NPV in ZAR using the ZAR equivalent cost of capital according to the Fisher effect and then converting to USD at
the current spot rate.
b. Converting all cash flows from ZAR to USD at purchasing power parity forecasted exchange rates and then calculating the NPV at
the dollar cost of capital.
c. Are the two USD NPVs different or the same?
d. What is the NPV in dollars if the actual pattern of ZAR per USD exchange rates is: S(0) = 3.75, S(1) = 5.7, S(2) = 6.2, S(3) = 6.5, S(4) =
6.9, and S(5) = 6.9?
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning